Business context and reporting period
Citigroup Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The company reports through Citicorp, its core consumer and institutional banking businesses, and Citi Holdings, a portfolio being wound down. Comparisons below are primarily with the third quarter of 2014; year-to-date figures cover the first nine months of each year.
Financial performance and condition
| Metric | Q3 2015 | Change vs. Q3 2014 |
|---|---|---|
| Revenue, net of interest expense | $18.7 billion | Down 5% |
| Net interest revenue | $11.8 billion | Down 3% |
| Operating expenses | $10.7 billion | Down 18% |
| Provisions for credit losses and benefits/claims | $1.8 billion | Up 5% |
| Income from continuing operations | $4.3 billion | Up 48% |
| Net income attributable to Citigroup | $4.3 billion | Up 51% |
| Diluted EPS | $1.35 | Versus $0.88 |
| Efficiency ratio | 57% | Versus 66% |
| Net interest margin | 2.94% | Versus 2.91% |
Reported results included positive CVA/DVA of $196 million pretax ($127 million after tax), versus negative $371 million pretax in the prior-year quarter. Excluding CVA/DVA, a non-GAAP measure, net income was $4.2 billion, or $1.31 per diluted share, versus $3.1 billion, or $0.95 per share. The filing attributes the increase mainly to lower expenses, lower net credit losses and a lower effective tax rate, partly offset by weaker revenue and a smaller reserve release.
For the first nine months, revenue was $57.9 billion, down 2%; operating expenses were $32.5 billion, down 20%; and net income attributable to Citigroup was $13.9 billion, up 100%. The prior-year comparison included a $3.8 billion after-tax Citi Holdings charge related to a legacy mortgage settlement.
Net credit losses in Q3 were $1.7 billion, down 21%. The net release of loan-loss and unfunded-commitment reserves was $16 million, compared with a $552 million release a year earlier. Citicorp recorded a $212 million net reserve build, including about $140 million for energy-related exposures; Citi Holdings had a $228 million reserve release.
For the first nine months, operating cash flow was $41.4 billion, investing cash flow was negative $17.0 billion and financing cash flow was negative $34.0 billion. Cash and due from banks fell $10.4 billion to $21.7 billion. These cash-flow totals include substantial movements in trading assets and liabilities and should be read alongside the company’s liquidity disclosures.
At September 30, total assets were $1.81 trillion, deposits $904.2 billion, long-term debt $213.5 billion and common stockholders’ equity $205.6 billion. Short-term borrowings were $22.6 billion. Fully implemented Basel III ratios were 11.7% Common Equity Tier 1, 12.9% Tier 1, 14.6% Total Capital and 6.85% Supplementary Leverage. High-quality liquid assets were $398.9 billion and the Liquidity Coverage Ratio was 112%.
Material changes and business drivers
- Expenses fell substantially, reflecting lower legal and related expenses ($376 million versus $1.6 billion) and repositioning costs ($81 million versus $382 million). Foreign-exchange translation reduced reported expenses by about $759 million; excluding that effect, expenses declined 13%.
- Citicorp revenue was $17.3 billion, down 2%. Global Consumer Banking revenue fell 8%, while Institutional Clients Group revenue rose 3% as reported. Excluding CVA/DVA, ICG revenue fell 3%, including a 16% decline in fixed-income markets and a 25% decline in investment-banking revenue.
- Latin America GCB revenue included an approximately $180 million gain from the sale of Mexico’s merchant-acquiring business. Excluding foreign-exchange translation and that gain, the filing says Latin America revenue was approximately unchanged.
- Citi Holdings revenue fell 32% to $1.4 billion, and net income was $31 million versus $212 million. Its $110 billion of assets were down 20% year over year and represented about 6% of total assets.
- Citigroup’s total loans, net of unearned income, declined to $622.4 billion from $644.6 billion at year-end 2014. Excluding foreign-exchange effects, Citicorp loans grew 5% year over year, while Citi Holdings loans continued to run off.
Outlook, risks, contingencies and unusual items
The filing provides no company-wide numerical earnings or revenue guidance. Management described continued market volatility, slower global growth and uncertainty about the timing of U.S. interest-rate increases. It expects some card-revenue pressures to persist in the near term, including high customer payment rates, rewards and acquisition costs, spread compression and regulatory changes. Citi said continued weakness in energy and commodity prices could prompt further energy-related reserve builds.
Risk areas include emerging-market and foreign-exchange exposures; legal, regulatory, compliance and conduct matters; changes in capital, liquidity and derivatives regulation; and the planned wind-down and sale of Citi Holdings assets. Citi had agreements to sell about $37 billion of additional Citi Holdings assets, with about $31 billion then expected to close before year-end, subject to approvals and other conditions. The OneMain Financial and Japan business sales were also pending closing conditions.
About 69% of Citi’s remaining revolving home-equity lines of credit were expected to begin amortizing during 2015–2017. For those loans, Citi estimated an average monthly payment increase of about $360, or 165%; higher interest rates could increase payments further. In its interest-rate sensitivity, a sudden parallel 100-basis-point increase was estimated to raise annualized net interest revenue by $2.1 billion but initially reduce AOCI by $4.45 billion and the fully implemented CET1 ratio by 50 basis points.
The filing estimated aggregate reasonably possible litigation and regulatory losses in excess of accruals at approximately $4 billion, materially unchanged from year-end 2014. Management said the matters were not expected to materially adversely affect consolidated financial condition, while noting that an adverse outcome could materially affect results or cash flows in a particular period. A settlement accepted by the SEC in August required certain Citi affiliates to pay $179.6 million, including disgorgement and interest, concerning management and marketing of alternative investment funds. The filing also discussed new Treasury-market manipulation lawsuits and other ongoing proceedings. Citi reported no activities requiring disclosure under Section 13(r) for Q3. Management concluded disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring expense and credit trends versus lower legal charges, tax effects, foreign-exchange translation and CVA/DVA movements.
- Whether energy-related credit deterioration and reserve builds continue, and how non-accrual corporate loans develop.
- Progress, timing and financial effects of the announced Citi Holdings disposals, including OneMain and the Japan businesses.
- Performance of HELOCs as scheduled payment resets proceed, including delinquencies, losses and reserve adequacy.
- Whether capital and liquidity remain resilient under market stress, regulatory changes and potential ratings downgrades; monitor the reported ratios and the assumptions behind fully implemented measures.
- Developments in litigation and regulatory matters, including the roughly $4 billion estimate of reasonably possible losses above accruals.